Hey, guys, welcome back.
In this video, I'm going to talk about retirement plans
and how you can take advantage of them to lower your taxes.
First, let's talk about the two main types of retirement plans.
Before we get into the specifics.
So first, there's defined contribution plans.
And this just means
that you have a predetermined contribution that you're paying in.
And what you're going to get back at some point in retirement
depends on how much you've put in
and what the earnings on that have been over time.
Or defined benefit plan where you're trying to figure out
what benefit you want to get in retirement.
And based off of that, with certain assumptions made based on
how long you have to retire, how much you're earning,
and all these other factors,
how much you have to contribute in order to get that benefit.
So those are the two main different types.
And then underneath you may have some additional options
that provide different limitations, different benefits.
And it depends whether you're a sole practitioner by yourself.
You're self-employed with an S corp or another type of entity
or maybe you have employees.
So first, let's talk about the difference between
a Roth IRA and a traditional IRA.
A traditional IRA means that when you make a contribution
that's deductible in that year and then with you withdraw
the funds in retirement, then it becomes taxable compared to a Roth IRA.
That actually is the reverse of a traditional IRA, which means that
when you make a contribution to the plan, it's not deductible.
However, the benefit that you get from that is that later
when you withdraw those funds because the original contribution
was not tax deductible after it's grown over time with the earnings
and you haven't been taxed on those earnings in the retirement plan,
then when you take those out in retirement,
those are not taxable distributions at that point.
One thing to make sure you remember is although you can contribute
to these types of retirement plans if you're covered under another plan
at work, you may be subject to limits depending on your income and the coverage
that you have there.
So make sure to check with your CPA if you have specific questions
on what you can deduct.
The next two plans I'm going to talk about are still defined contribution plans,
but these are really better geared towards self-employed individuals.
So the first one is the SEP or the self-employed pension plan.
So this is a very simple plan to set up.
It essentially just requires creating a document opening an account,
and making sure that you make the contributions on time.
And one of the big benefits of this is you actually get more time
to make those contributions you have until the extended
deadline of the tax return for the year that you want it to apply to.
So this potentially can extend you out to September or October
to make those contributions for the prior tax year.
The other benefit of a set is that the limit is higher
than some of the other types of retirement options that you may have.
So for 2022, the limit is 61,000,
or if it's lower, 25% of your compensation.
Now, something to remember about the SEP is that
you have to contribute for all employees equally.
So if you have multiple employees
or there's really anyone other than yourself,
then you have to remember that if you contribute for yourself,
you have to contribute for them also.
So this is typically something that is ran by people operating on their own.
The next retirement plan that's really important for self-employed
individuals is the solo four and one K, and this could be called different things,
but essentially it's someone that has a41k by themselves and you get a higher limit
than some of the other plans, but less than a sep still.
So on this plan you can deduct the lesser of 100%
of your compensation or $20,500, and that's the limit for 2022.
It changes each year.
So if you have one of these plans, make sure that you keep up
with those changes so that you can max it out if you want.
Now, as with many of the other retirement plans, if you're 50 or older,
you can actually do catch up contributions.
And in that case, the limit for 2022 is 27,000.
In addition to those elective deferrals,
as an employee of the business, you can also have
the business making an additional 25% contribution.
A simple example of this would be if a taxpayer
who let's say he's 51, so he's over 50, he has an S corporation
and he pays himself 50,000 and wages for the year.
We know that he can deduct the lesser of his compensation,
which was 50,000 or 27,000 because he's over 50.
So let's say maximizes that deduction
and he throws in 27,000 for the plan.
Well, then the company can do an additional contribution,
up to 25% of his compensation.
So 25% of his 50,000 in wages,
that'd be an additional 12,500.
So in total, he'd be able to contribute through the S corporation
and elective deferrals on his W-2 39,500.
And that can make a big difference.
And that also makes the difference because remember, like I said before,
when you put the money in the retirement plan, now
all the earnings on that is tax free until you withdraw it in retirement.
Okay, let's move on.
Remember at the beginning of the video, I talked about the difference between
defined contribution plans, which are all the plans that I've just covered.
Well, now we're going to move on to the defined benefit plans.
So remember, this is a plan where you're trying to figure out what you want
and retirement,
and then you're calculating or really you're having someone else, an actuary,
calculate how much you have to contribute to the plan in order to get that benefit.
Now, this is really for higher income taxpayers
because it's a much more expensive plan to maintain
because like I said, you're having to hire outside experts to do very difficult
calculations and there's additional filing requirements for the plan.
But if you're a high earner, you can put away a lot more each year
than all the other defined contribution plans that I just discussed.
So for 2022, your maximum limit on a defined benefit plan
could be 245,000, depending on your compensation and other factors.
So that makes a big difference.
But obviously you have to have enough income and be able
to justify the expense of maintaining the plan.
Now, I've covered a lot of the most common retirement plans that you could set up.
There are other options, but these definitely
give you a nice guideline to choose from initially.
There's a lot more rules and details than what I've covered in this video.
So make sure you check with your CPA
before you do anything to make sure that you don't run into any issues.